Should You Bet on What The Wealthy Do Today? – chronicles – Medium
If you look at what the wealthy do… “scale economies and online efficiencies will combine to keep driving prices down within this business model, and entrepreneurs will soon realise that the middle class is a huge market, and so tailor offerings toward it.”
Thus, Hal Varian concluded “a simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade. Think of VCRs, flat-screen TVs, mobile phones, and the like. Today, rich people have chauffeurs. In 10 years or less, middle-income drivers will be able to afford robotic cars that drive themselves, at least in some circumstances”.
The belief in the Varian Rule has certainly driven many VCs to bet heavily on the “on-demand economy”, which tried to replicate the convenience of services dedicated to the ultra wealthy for mainstream consumers.
The decreased transaction costs, increased convenience and decreased barriers to entry, might increase the market and change the habits of the upper middle class in the megalopolis, but it would be very surprising -all things being equal- if these habits would become international mainstream. It is just too expensive since a large percentage of the costs are not compressible.
I think we should make at least three observations about these discoveries:
- The Varian Rule seems eventually quite compelling in the light of these generalizations (earlier adopters have a higher social status, and overall, more wealth).
- These relationship are mere correlations. No causality can be concluded on the basis of available cross-sectional data. In other other words: we cannot know whether earlier adopters innovate because they are richer or if they are richer because they innovate (mostly thanks to an increase of productivity).
- If you assume that earlier adopters become richer because they innovate (and point 6 could be an indicator of that), the Varian Rule could be (at least partially) invalidated: innovations could not go from the wealthy to the non-wealthy but from the soon-to-be wealthy to the already wealthy (and then to the non-wealthy).
But if we say that the Varian Rule covers only a subsegment of the segment of early adopters, who are the other people to observe?
Opinion Leadership, Diffusion Networks, Weak Ties & Change Agents
If we try to summarize all of this and develop our understanding of diffusion of innovation, we shall say that: opinion leaders are super effective in bringing behavior change and diffusing innovations. They can be rich. But they not always are. They are the people to observe closely.
- Research traditions indicate that the main challenge for a given innovation to become mainstream, is to cross the chasm from the early adopters to the early majority. When the chasm is crossed, you reach a critical mass (tipping point).
- -Research suggests that, overall, innovators and early adopters are wealthy, so it can be a good idea to just observe what the wealthy do to predict future usages.
- -Yet, innovations and early adopters might only become wealthy by their use of innovations (increased productivity & economic attraction), which has been the case for many innovations brought to the market “by the street”. So solely focusing on the wealthy would NOT allow to fully predict future usages (it would be only partial).
- -Observing the wealthy, as suggested by the Varian Rule, is especially a good idea when the products and services can become significantly cheaper through technology, at a fast pace (which would explain why VCs focus on scalability and on products and services where marginal costs can be very low).
- -To make sure not to miss an innovation, we should observe opinion leaders (and many rich people are, so it’s not a pure contradiction of the Varian Rule), the more cosmopolite and mobile they are, the better bridge links they will be. These people are often at the crossroad of many social, economic and cultural systems and often a good way to predict the future.
- If you apply this topic for VCs, two big questions remain:
- 1. Should VCs only focus on innovations when they already reach the opinion leaders, or should they also fund products and services before they do (R&D stage or before launch)? Market practices suggest that institutional investors focus on the former (excepting seed & pre-series A investments), especially because the expected value of these investments are higher (higher probability of success).
- 2. If VCs focus on the innovations that already reached opinion leaders (and started to have some tractions), the other big question is: how to determine which innovations you should bet on? If there is a chasm between the early adopters and the early majority, it’s because many innovations talked about by opinions leaders will never work… But that’s for another post.